A number of commercially available software programs and online options offer “customized” do-it-yourself Wills and other estate planning documents. These programs and websites seemingly offer a cost-effective and convenient alternative to paying an estate planning attorney to prepare an estate plan.
In times of economic uncertainty, it is especially tempting for our clients to put off planning, or to take an easier, more cost-effective route to an estate plan, in the hopes that a more comprehensive plan will not be necessary until later. Online services promise substantially the same basic estate planning documents as those prepared by an estate planning professional for considerably less money.
But is online or software-based do-it-yourself estate planning worth the initial cost savings? Are the documents created an adequate replacement for a consultation with a qualified attorney? ElderLawAnswers* recently reviewed three leading online estate planning services to answer these questions. ElderLawAnswers found that, while the documents these programs produced were adequate, each online service had significant limitations in the information-gathering process that could lead to defects in the final product. Moreover, no pre-packaged program was able to take account of crucial differences in state laws or encompass complicated family arrangements that are common in today’s modern society. As a result, according to ElderLawAnswers, the use of these off-the-shelf programs often led to unfortunate and unanticipated results for their users and their families.
ElderLawAnswers concluded that, while online estate planning could possibly work for people who have little or no property, small savings or investments, and a very traditional family situation with no special circumstances, “the significant remainder of the population should not rest easy using one of these programs and should instead consult with a qualified estate planning attorney.”
Planning Tip: In all but the most commonplace estate planning situations (and only an attorney can determine what is “commonplace”), do-it-yourself estate planning programs can be a risky, and often quite costly, substitute for in-person planning with an experienced estate planning attorney.
Online Programs Are Easy to Use
In analyzing the effectiveness of online estate plans, ElderLawAnswers reviewed three leading online estate planning programs: Nolo’s Online Will, BuildaWill and LegalZoom. ElderLawAnswers purchased Wills from all three websites, and also ordered a “Living Trust” from LegalZoom. Two experienced estate planning and elder law attorneys completed the documents and evaluated the programs.
All three websites were found to offer easy-to-use interfaces and to provide help via e-mail or over the phone if a user ran into trouble preparing the documents. ElderLawAnswers reported that Nolo and BuildaWill both allowed users to download their Wills instantly, while LegalZoom shipped the documents in a personalized estate planning binder.
ElderLawAnswers conducted a detailed analysis of each of the three websites. A summary of their findings follows.
Nolo’s Online Will package costs $69.95, and takes about 30 minutes to complete. Once an account is created, Nolo walks the user through eight steps, with multiple questions in each step, designed to complete all the information in the Will. Every time Nolo asks a question, a text box next to the question clarifies what the program is looking for and often offers links to more specific questions. For instance, when filling in a spouse’s name, the program offers hints for spouses who are known by more than one last name, as well as what to do if one’s marital status changes. Upon completion, Nolo not only saves the Will, but allows the user to go back and edit the Will for up to a year after purchase.
Nolo’s Online Will allows users to name a registered domestic partner in place of a spouse, and properly provides a warning about the legal status of those partners in states that refuse to recognize them. Unfortunately, Nolo’s program does not address the legal implications of leaving all of a user’s property outright to a spouse under one of their simplified property distribution options.
Planning Tip: For families with larger estates, leaving all property outright to a spouse can lead to avoidable estate taxes upon the surviving spouse’s death. Even leaving a more modest estate to a spouse can have unintended consequences. Leaving assets in trust for a surviving spouse can have asset management, asset protection and asset distribution benefits that “do-it-yourself” plans do not discuss and that they offer no options to draft.
Later on in the estate planning form, Nolo’s system does suggest speaking with an estate planning attorney if a user is concerned about the size of the estate, but the warning is not prominent, and most users will never see it unless they poke around far more than most users are likely to do.
BuildaWill was the most basic program and, at $19.95, it was by far the least expensive. It performed a pre-screening evaluation before allowing users to create a Will – an important step that the other two sites neglected. This questionnaire checked to make sure the user was a U.S. resident, and asked several questions about the possibility of the Will being challenged and the mental capacity of the person creating the document. The BuildaWill questionnaire was easy to complete and took only about 15 minutes.
On the other hand, BuildaWill often simplified complicated decisions, such as allowing the user to choose either an Executor and an alternate or up to three Executors to serve together, without really explaining the difficulties of having several people serve at the same time. Like Nolo, BuildaWill ignored the ramifications of leaving property outright to a surviving spouse. Unlike the Nolo Will, the BuildaWill document did not include an option for trusts for minor children.
Planning Tip: If a parent dies without a Trust for minor or immature children, a Guardianship proceeding may become necessary, or the child could get all of the money outright, in his or her name, at an age when the child is unable to properly manage assets. A properly-drafted testamentary trust for the child is a much better option. Not only does it avoid Guardianship for a minor child, it safeguards assets for young adult children and, if properly drafted, can provide substantial asset protection benefits during the entire life of a child.
ElderLawAnswers used LegalZoom to prepare a “Living Trust,” which is designed to hold assets while the client is still alive, and then pass on any residual estate when the client dies. The Living Trust, which also comes with a Will designed to pour into the Trust, costs $228.95. Living Trusts can hold substantial assets and are often used to avoid probate and reduce or eliminate estate taxes. LegalZoom offered the option of what it called an “A-B” Trust as part of an overall estate tax plan, but ElderLawAnswers reported that the website did not adequately explain the implications of funding such a Trust at the death of the first spouse to die, including the possibility that the surviving spouse would need to request funds from an independent Trustee if her own funds ran out.
According to ElderLawAnswers, the LegalZoom questionnaire was the most extensive of the three web-based programs (no doubt because a Living Trust is typically more detailed than a Will). The program’s interface was reportedly easy to use but required the user to look for help if and when needed, usually by clicking on a help icon. Since the Trust is designed to own assets, the site asks the user to complete quite a detailed list of the assets to be transferred into the Trust, including information about those assets. While doing so, the website explained that it could also prepare deeds to transfer property into the Trust, for an additional fee. When the documents arrived weeks later, via standard shipping, the package included detailed instructions for executing the estate planning instruments, along with guides for Executors and Trustees.
However, LegalZoom (as well as the other two programs) never offered advice about who would be an appropriate Trustee or Executor, according to ElderLawAnswers. Conceivably, this means that a user could name a minor child or someone with diminished capacity as the protector of their assets, leading to the need for a replacement Trustee and resulting in unnecessary fees and expenses.
Planning Tip: The qualifications to act in the capacity of Trustee and Executor vary from state to state. Not being aware of or understanding those requirements may lead to the disqualification of an Executor or a Trustee, resulting in substantial cost and delay in the administration of the estate of a decedent. In addition, the interplay of distribution standards and identity of fiduciaries (i.e., Executors, Trustees, Agents under Powers of Attorney) can have tax and asset protection consequences beyond the knowledge of most lay persons.
While the three programs reviewed by ElderLawAnswers make it very easy to create basic documents, the sites do not perform a detailed assessment of each user’s true estate planning needs. Estate planning attorneys generally have detailed discussions with their clients about their family and financial situations, including their relationships with their children, special or unique planning requirements, and their goals and objectives.
Planning Tip: If a child, grandchild or other family member has problems handling money, has high levels of debt, is in a bad marriage or anticipating a divorce, or has unique medical or health care issues, the estate plan should address these issues and certain provisions of the plan must be adjusted. Especially if a family member has special needs, the online programs don’t ask appropriate questions or address these potentially crucial issues. Whenever a client presents such issues, the estate plan can, and should, be drafted to accommodate them.
Outside of the specific pluses and minuses of each site, the online programs suffered from a number of significant general defects, according to ElderLawAnswers.
State Laws Vary
First and foremost, most estate planning programs do not address complicated and often unyielding variations in state law. Since there is no national probate code, a computer program or website cannot hope to replicate the knowledge of a qualified local estate planning attorney who knows the intricacies of state law.
For example, Florida law allows those making a Will to attach a separate written memorandum, which can save money by not requiring the Will to be redrafted every time a change is needed. But making proper use of this option is tricky and those executing Wills can easily end up failing to effectively transfer items included in the memorandum.
Planning Tip: In Illinois, a memorandum outside the Will is ineffective to transfer assets, even personal property, unless certain very specific requirements are met. The best practice in Illinois is to keep the Will as a self-contained document that does not refer to outside or attached memoranda.
Planning Tip: Requirements for execution of a Will vary from state to state. In Illinois, if the very specific and technical requirements for the execution of a Will are not followed, the Will is subject to attack and may be voided and thus held to be ineffective.
Undesired Results Abound
Using a do-it-yourself Will or other estate planning document may have undesired consequences. In one case, a Massachusetts man used a pre-packaged Will form to leave his home to his wife and his four grown children. The Will did not give the wife the option to remain in the house for the rest of her life. A court case ensued because the children, who possessed the majority interest in the property, could have legally forced the wife to move.
In another case, a father had purchased a Will online. After he passed away, his son found his Will, which left specific items and bank accounts to certain people. But in the years after the man had executed the Will, some of his beneficiaries had died and some of the specific items mentioned in the Will dropped out of his estate. Cars had been sold, accounts closed and new ones opened. His Will had made no provision for what to do if a beneficiary died and it had no “residuary clause” to tell his Executor where items not specifically mentioned in the Will should go. Much of what was in the man’s estate passed according to intestacy laws, as if he had never made a Will at all. In trying to save money, the man had cost his intended heirs dearly.
In yet another case, a man executed a Trust form leaving his substantial estate to one niece, but because he never funded the Trust or executed a Will, everything was divided among all of his nieces and nephews, including one who he had no intention to benefit.
A 2004 court case from the state of Washington, Woodard v. Gramlow, offers a particularly costly example of how do-it-yourself estate planning instruments can backfire on the preparer. In June 1998, Charlene Young’s half-sister, Jacqueline Gramlow, helped Ms. Young plan her estate. Using a legal software program, Ms. Gramlow prepared three documents: (1) Ms. Young’s Will; (2) an attachment; and (3) a Living Trust. Ms. Gramlow was not a trained legal advisor. The attachment provided that the proceeds of Ms. Young’s life insurance policy should be used to pay funeral costs and other debts normally paid by an estate.
When Ms. Young died, the question became whether the attachment was a part of her Will and, if so, whether it created a Trust to hold the insurance proceeds. If the attachment was part of the Will, then the insurance proceeds would be under the control of Ms. Young’s estate to pay its debts. If the attachment was determined not to be incorporated into the Will, then Ms. Gramlow would receive all the life insurance proceeds. In the end, a state appeals court determined that the insurance was part of Ms. Young’s estate, and Ms. Gramlow lost a portion of her inheritance. This result was reached at great expense to the estate. It could all have been avoided if Ms. Young had simply paid a visit to a qualified estate planning attorney.
Programs Often Overlook Estate Tax Issues
Many states also have their own estate tax systems that have wildly different thresholds. For instance, Illinois currently taxes estates in excess of $3.5 million ($4 million in 2013), even though the federal estate tax for those dying in 2012 taxes only estate over $5.12 million. An estate planning website that prepares basic Wills for customers without regard to the size of the estate could miss this distinction, resulting in tens or hundreds of thousands of dollars in increased estate tax liability.
Planning Tip: The interplay of state and federal estate taxes often requires special planning and customized estate tax provisions in order to minimize taxes at both the state and federal level. Each client’s specific situation must be reviewed and a determination made regarding the plan that is appropriate for that client’s situation. Especially in states such as Illinois, which has an estate tax system de-coupled from the federal estate tax, improper planning can lead to unnecessary taxes being paid by a surviving spouse or by children or other beneficiaries.
Computerized estate planning programs are not designed to provide estate tax advice or estate tax planning, and the programs do not draft complicated Trust instruments. With the federal estate tax rate at 35% (and the maximum rate scheduled to increase to 55%), and the Illinois estate tax having a maximum rate of 16% on top of the federal estate tax, families need to consider whether the “convenience” of a computerized estate plan outweighs the risks of improper estate tax planning.
Retirement Accounts and Income Tax Issues
One of the most overlooked issues in estate planning generally, and in do-it-yourself plans specifically, is planning for retirement accounts, such as IRAs, 401(k) plans, 403(b) plans, Profit Sharing plans, and others. Most retirement accounts are pre-tax savings accounts intended to supplement the clients’ retirement, with any balance transferring to spouses and children or other family members. Because these accounts have not been taxed, all distributions from such accounts are subject to income tax, as well as being a part of the clients’ taxable estate for estate tax purposes. Avoiding a double layer of taxation, or at least reducing the overall tax liability, should be a crucial planning objective.
For many of our clients, retirement accounts make up a large portion, or even most, of their estate assets. Coordination of retirement plan beneficiary designations with the overall plan of disposition is ignored by online and software-based estate planning programs. A plan, even one that is well-drafted, that ignores a major estate asset is not appropriate and usually fails to accomplish the clients’ overall objectives.
Planning Tip: Clients ignore retirement plans in estate planning at their peril. Designation of beneficiaries of retirement plan assets has implications, not only for distribution of retirement plan assets, but also for estate and income taxation of those assets to the beneficiaries. The IRS rules regarding income taxation of retirement plan distributions are complex, and it is very easy to get “tripped up” by them. Stretching distributions, and thereby postponing income taxation on those distributions, requires the application of special and sophisticated techniques not available, or even discussed, on do-it-yourself planning sites.
Estate and income tax planning opportunities and coordination of retirement plan beneficiary designations with a client’s estate plan are important to most clients, but those issues are all but ignored by planning software and websites.
Mixed Marriages Muddy the Waters
The classic “Ozzie and Harriet” family paradigm is rapidly ceasing to be the norm. Many parents have been married more than once or have had more than one relationship that either produced children or that brings with it non-biological children who are viewed as part of the family. Many parents in these so-called “mixed marriages” run into problems with do-it-yourself estate planning documents because they often think of their stepchildren, whom they may not have legally adopted, as their own children. When the parents then draft do-it-yourself Wills or Trusts leaving their estate to their “children,” legal chaos can ensue and it often takes a court to sort out what a parent actually wanted to accomplish with the estate plan. Did he want to leave his property to his entire, extended, family (including stepchildren), or merely to his biological children? Litigation in this area can be prohibitively expensive and often ends up squandering the parents’ estate. In one recent case, stepchildren paid $100,000 in legal fees to claim their inheritance.
Second marriages, especially those in which one or both partners have children from a previous relationship, add planning concerns not addressed in these programs. While husbands and wives generally want to provide for one another, when they are both gone they want their respective children and grandchildren to receive their shares of their combined estate. This is unlikely to occur if they have so-called “I love you” Wills giving everything they have to the surviving spouse. At the death of the surviving spouse, in most cases everything will go to the surviving spouse’s family (or to a new spouse) rather than being split evenly. In other situations, it may be eaten up by the surviving spouse’s long-term care costs. All of these possibilities can be avoided through proper estate planning, for which no provision is made in these programs.
Same-sex relationships, with or without children and with or without state sanction, can create the need for more complicated estate planning, as well. The large number of grandparents raising grandchildren creates the need for “handmade” as opposed to computer-generated documents. It is difficult, if not impossible, for a rigid, forms-based system to anticipate all of the alternatives in such situations.
Planning Tip: “Special” circumstances, which exist in most families today, require special, customized planning not available in a simple software program. Planning that incorporates Trusts with specific provisions to address the various circumstances that today’s families often face can address these special situations. Thoughtful and proper drafting can mean the difference between preserving family harmony or setting the stage for long and bitter legal battles.
Strategies for Shielding a Child’s Inheritance
According to ElderLawAnswers, none of the online programs offered parents the opportunity to protect their adult children from some of the financial consequences of divorce, bankruptcy and illness.
Planning Tip: Rather than giving an inheritance to a child outright and risk the child’s later losing it to creditors or in a divorce settlement, parents can create “spendthrift” or “inheritance protection” Trusts that hold assets for the child. This shields the inherited assets from some (but not all) creditors, and protects the assets from a divorcing spouse.
Special Rules for Special Needs Children
One of the most delicate areas of estate planning involves families of children with special needs. In most cases, especially when the child with special needs receives or anticipates receiving government benefits, it is essential to avoid leaving money to a child directly. An entire category of Trusts, known as Supplemental Needs or Special Needs Trusts, are designed to work within the arcane rules and restrictions of government disability benefits. Once again, the do-it-yourself estate planning tools reviewed by ElderLawAnswers don’t account for these very complicated rules. When a child with special needs is involved, an improper distribution from a parent’s do-it-yourself estate plan can result in the loss of the child’s health insurance, education, and supported living arrangement, along with the disappearance of the inheritance due to mandatory pay-back provisions, state liens, mismanagement or unscrupulous individuals taking advantage of the child.
Planning Tip: Though many estate planning professionals do not work in the area of Special Needs, they have the experience to recognize when such planning is necessary or appropriate and can then refer the client to a Special Needs planner. A properly drafted plan can also anticipate special needs, even where none exist at the time the plan is drafted. Stand-by Special Needs provisions are an integral part of a properly drafted estate plan.
Plan Maintenance and Upkeep
An estate plan that is drafted today may, or may not, be effective to accomplish a client’s goals next year, the year after, or ten years from now. Estate planning professionals have processes and procedures in place to keep an estate plan up-to-date and current. A do-it-yourself plan has no such procedures. Even assuming an effective plan, it is up to the client to update the plan and to keep it current.
Planning Tip: If using a Living Trust, asset allocation and asset funding issues have as much to do with the effectiveness of the estate plan as the documents that create the plan. Even if the client has a simple Will, circumstances, both personal and financial, change constantly. Federal and state laws affecting Wills and Trusts change. Tax laws, to the extent that they affect the plan, are in a constant state of flux. Most clients are unaware of these changes or fail to realize that changes in their lives affect their estate plans. A scheduled review program can help assure that the clients’ estate plan works the way it was intended, whenever the plan is called upon to perform its intended function.
Every day, families prepare their most important estate planning documents using computerized estate planning programs that issue standard disclaimers. Companies selling these documents want to make sure customers understand that these companies are not applying the law to the facts in their particular situation, that they are not giving legal advice, and that the information they provide is not guaranteed to be correct, complete or up-to-date. Although no one likes to talk about it, occasionally estate planning attorneys make mistakes as well. But when they do, the legal system offers a remedy through a malpractice suit and damages, paid for through professional liability insurance. Unfortunately, online estate planning programs are merely tools for consumers to use to draft their own documents. If there are errors, there is no remedy and no recovery.
Conclusion: Is It Worth the Risk?
According to ElderLawAnswers, “The documents produced by the online programs we tested were good. The problem is that estate planning involves a lot more than producing documents.” As the examples in this article illustrate, it is impossible to know, without a legal education and years of experience, what the right legal solution to any particular situation is and what planning opportunities are available. The actual documents produced are simply tools to put into effect a plan based on each client’s particular situation and goals.
If there is anything about a family situation that is not “commonplace,” using a do-it-yourself estate planning program means taking a large risk that can affect a client’s family for generations to come. And only a licensed and experienced estate planning attorney can determine whether a particular situation qualifies as “commonplace.” The problems created by the client who does not get competent legal advice probably won’t be borne by that client, but those problems may well be shouldered by the client’s children and grandchildren. If you want to make certain that your clients are taking the right steps for themselves and their families, direct them to seek the advice of an experienced estate planning, elder law or Special Needs planning attorney.
* ElderLawAnswers is an organization that supports seniors, their families and their attorneys in achieving their goals by providing the following services:
Information on the Internet about crucial legal issues facing seniors.
A network of highly qualified elder law attorneys nationwide.
Online practice tools for elder law attorneys.